‘There is high probability of interest rates to be much lower over the next two years’, says Nimesh Shah, MD & CEO, ICICI Prudential AMC

Where are the markets headed?

The market is now fairly valued with most sectors trading near their long term average valuations, clearly discounting the 2014-15 earning numbers. While, we believe that the near term is likely to see head-winds due to weakness on the global front, our long term view on India being one of the biggest structural opportunity in the world remains intact.
The last year’s base impact was quite bad. Consequently, there is a possibility of good numbers coming out in the following months on inflation, industrial production and various other fronts. This will further add to the optimism in India. We advocate that the market rally has more legs to go because the factors that characterise a market top - like industrial production growth in double digits, much lower interest rates and inflation - are still two to three years away from this point.

Which sectors/themes look promising and the reasons?

Themes like banking and infrastructure look attractively valued for the long-run as there is scope for capacity utilisation to pace up in industrial and manufacturing sectors. One can derive valuation comfort by looking into the future because therein lies confidence of an economic recovery in the next 3-5 years. Within market caps, the mid-caps have caught up with the large-caps in terms of valuations. With both segments at same level, the one with higher growth in earnings will perform better.

How should one go about investing in the current market?

We believe investors should constantly adhere to the asset allocation depending on their risk profile. Adhering to asset allocation, instils discipline in investing, helps avoid the tendency to redeem at market bottoms and invest at market tops. Also, spreading investments across more than one asset class reduces risks and moderates the effect of an individual asset class on the overall portfolio returns.

Could you shed some light on fixed income vs a pure equity funds?

The unprecedented returns delivered by the equity markets have built up huge expectations in the minds of investors. The fundamentals pertaining to 2014-15 corporate earnings have already been priced into the market. On the debt side, macroeconomic improvement and fiscal prudence could bring down interest rates over the next 2 to 3 years.
With inflation and CAD lowering, improving government finances and stable currency, there is high probability of interest rates to be much lower over the next two years. We expect 10 year benchmark yield to be lower by 2016. RBI delaying the monetary softening is clearly providing the time to investors to increase the allocations towards fixed income in the portfolio.
We strongly recommend investing in long duration funds with a long- term investment horizon for attractive returns in the next 2-3 years.
 

What would be the best mix for retired people?

An investor who is retired or nearing retirement should preferably have inclination towards funds which will offer stability of returns. Therefore, larger portion of their investments should comprise of MIPs/hybrid schemes for stability and some portion of the portfolio could be allocated to equity for long-term growth.